Monday, December 30, 2013

Banking on Failure

If you're like most people, it doesn't feel like we ever fully recovered from the crash of '08.  For most, the past five years have been stagnant at best and worse for the unfortunate.  Well, brace yourself, for the Wizards of Wall Street and their branch plant operators in Canada and elsewhere may be setting us up for another battering.

Spiegel Online brings us the cautionary tale of Michigan hedge fund manager Mark Spitznagel whose clients are willing to lose money to bet on the next big crash.

For his customers, Spitznagel's multi-billion-dollar fund acts as an insurance policy against the next meltdown in the financial system. When the market is doing well, they lose modest amounts of money. But they cash in as soon as prices take a nosedive, even when all other investments are going up in smoke.

The hedge fund manager has made a lot of money in the past with his prognoses, and he is convinced that substantial turbulence is on the cards for the near future. "The setup is there for it," says Spitznagel.

Since the last crisis, central banks around the world have pumped trillions into the economic cycle, both by lowering interest rates and buying up securities in the markets. For central bankers like United States Federal Reserve Chairman Ben Bernanke, the aim of the policy was to stimulate the economy and rescue banks that could no longer raise capital elsewhere. But this "grand monetary experiment," as Spitznagel calls it, has side effects. Because it makes borrowing cheaper than even before and saving all but pointless, it encourages investors to pursue reckless deals. Share prices are exploding on stock exchanges around the world, while real estate prices are rising at an alarmingly fast pace. And many US companies are now in as much debt as they were before the financial crisis.

To take Spitznagel's metaphor a step further, the flood of money coming from central bankers acts like a highly aggressive, artificial fertilizer. It generates enormous yields in the short term, but eventually leads to potential devastation.

Perhaps the best you can hope for is that, if Spitznagel's vision is right, the next big crash might help bring us to the point where we finally realize we have to throw this neo-liberal, casino economy and bring in a new model that works not for them but for you and me.

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